A Political Economy Model of Capital Expropriation and Skilled Migration

This paper studies the interplay of capital resources in a small open economy by way of a general equilibrium political economy model. Normative implications for human capital migration resulting from physical capital lobbying are analyzed. Findings reveal that lobbying designed to mitigate the capital levy problem leads to increased human capital migration and that optimal tax policy for a social welfare maximizing government necessarily implies “brain drain”. The implication being that skilled migration may be an inevitable by-product of a self-interested government. As such, while governments may vow to do something to stem the flow of their “best and brightest”, the financial pull of increased revenues appears simply too great to imply anything other than lip service, when general equilibrium effects are considered. As a corollary, we find that restrictions on political contributions are welfare enhancing in the two-sided expropriations model we present.